Mike Kerley looks at the investment opportunities available to investors hoping to invest in China and the rest of Asia
These are difficult times for those who depend on a steady income from their investments. Savings rates have fallen significantly over the past few months which is a particular problem for those coming up to retirement. In many ways, it is the dramatic fall in income rates, rather than the erosion of capital, that is causing the most distress to older investors.
Traditionally, British investors seeking income with the prospect of capital growth have focused their attention on the high yielding shares of UK companies. But this is changing - income investors are starting to look overseas, and Asia is an increasingly popular destination.
I manage Henderson Far East Income Limited, which was the first fund to specialise in Asian equity income when it was created in its original form in 1989.
In this time, Asian dividends have proved to be surprisingly resilient. We have seen some cuts, but mainly in export-related areas. And any investor who thinks that Asian opportunities are confined to growth stocks should think again - over the last 30 years (1978-2008) dividends have represented a remarkable 59% of the total return from Asian equities.
Those who regard Asian equities as a fundamentally risky proposition should also reconsider.
Most Asian economies have proved to be less vulnerable to the effects of the credit crisis than their western counterparts.
Asian companies generate higher cashflow with lower gearing, while Asian consumers are not as heavily mortgaged and tend not to have credit card debts.
Many of the region's economies are now stronger than those in the west - they have spent 10 years deleveraging while the developed world has moved in the opposite direction.
In fact, we now live in an increasingly polarised world.
The economies of the east tend to be in surplus, whereas those of the west are in deficit. Savings rates in Asia are very high, while in the west they are unusually low.
There has been no sub-prime lending crisis and in general Asia has not suffered from a property bubble - property prices in Hong Kong are below 1997 levels.
Crisis not 'made in China'
As the region's most powerful economy, China is naturally the focus of investors' attention and Chinese stocks account for over 20% of Henderson Far East Income's portfolio.
Currently it is the only major economy in the world not in recession, on course to deliver 8% real GDP growth this year.
The credit crisis was most definitely a western-made catastrophe but because China has cash to spare, its response has been much faster and stands to be more effective than the west's.
China has mounted one of the world's largest fiscal stimulus packages and with one important difference: Chinese children will not be paying for it for the rest of their lives because the country has no need to borrow money to fund its stimulus.
I am optimistic China will continue to grow its market share, even in a downturn. I think China retains a key competitive edge. Manufacturing wages are still only one fifth of the wages in Mexico.
This phenomenon is not, of course, confined to China. Right across Asia, we see similar opportunities. Asian investors face the same problems as we do in the UK - interest rates have fallen dramatically. In Taiwan, for example, savers can only earn 1% on money held on deposit, against 4.5% on equities.
This unprecedented spread between deposit and equity yields must, in time, boost investment - and there is plenty of cash waiting for the right opportunity.
The money held on deposit in Taiwan amounts to twice the capitalisation of the equity market.
Asian investors are traditionally seen as short-term traders, but as they switch money from deposits to equities I predict that they will start to take a longer-term view, and this will lead to a reduction in volatility in these markets.
We have already seen a similar phenomenon in Australia, where compulsory superannuation in the 1990s boosted long-term buying of equities, making Australia one of the best performing of the developed markets over the decade to 2005.
In the short term, I see continued turbulence in Asian as in all world markets.
However, on a three to five year view, it will become increasingly clear that Asian economies are built on firm foundations, with the capacity for significant growth.
I believe that this is the perfect scenario for Asia.
Investors who take a long-term view and who depend on the income they receive should look closely at China for investment opportunities.
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From 1 April 2019
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